From April 2005, employees can receive up to 50 a week of childcare, free of tax and National Insurance, where their employers either contract with an approved childcarer or provide vouchers for the purpose of paying an approved childcarer.
What is new?
Currently, where an employee receives childcare or childcare vouchers as a benefit-in-kind, a tax charge arises on the benefit, except in limited circumstances where the employer provides a nursery on the employer's premises, or one that is wholly or partially managed and financed by the employer. No employers' Class 1A National Insurance charge currently arises on the provision of childcare, and childcare vouchers are currently exempt from Class 1 National Insurance. But from April 2005 the first 50 a week of contracted childcare or vouchers will be tax-free and the National Insurance exemption will be aligned with this.
What are the tax breaks worth?
Each employee is only allowed one tax break regardless of the number of childcare places they pay for. So both parents can claim the tax and National Insurance relief if they are working and their employers implement the scheme.
The more you earn, the more tax you pay and the more you will gain from tax breaks. A parent on the 40 per cent higher rate of tax will receive an extra 20.50 a week, making a total of 41 for a working couple, while basic rate taxpayers will gain 16.50 a week, or 33 per couple. The proposals will also cover step-parents as long as the child is maintained wholly or partly at the step-parent's expense.
Are there restrictions?
The employer must make the scheme available to all staff and the childcare must be registered or approved home childcare.
What age of children are covered?
The tax breaks will apply to parents paying for childcare until 1 September following the child's 15th birthday, or 16th birthday if the child is disabled. Childcare means any form of care or supervised activity that is not provided in the course of the child's compulsory education.
Will the tax break impact on my claim for the childcare element of Working Tax Credit?
The tax break will be disregarded when looking at your income for assessing entitlement to working tax credit. But it is not yet clear whether parents will have to deduct the value of the tax break from their total weekly childcare bill when making a claim for the childcare element of the Working Tax Credit. Full details will be announced in the autumn, available at www.inlandrevenue.gov.uk
What are baby bonds?
Child Trust Funds (CTF) are savings and investment accounts for children.
Parents will be able to choose from a range of cash or equity accounts. The Government will give your child an initial voucher of 250 to start the account and then you, friends and family can make additional contributions. The minimum you can pay in is 10, and the maximum you can invest is Pounds 1,200 a year. Income from the account will be tax free. The account will mature when your child is 18, giving them a reasonable nest egg.
Who is eligible and how much do they get?
All children eligible for Child Benefit, living in the UK, born after 31 August, 2002 are eligible when the scheme starts in April 2005. Children living in families whose annual income is below the Child Tax Credit limit, currently 13,320, will receive a second 250 voucher. The Government will make a further payment on a child's seventh birthday and there again will be an extra amount for children from poorer families.
What do we have to do?
When the scheme starts, the voucher/s will be sent automatically to the person claiming child benefit for each eligible child, along with an information pack. You can then open a CTF account with a provider of your choice. If a CTF account is not opened within a year, the Inland Revenue will open one for the child.
